What is Not Forbidden is Compulsory

Our titular protocol certainly simplifies matters, now, doesn’t it? If (insert discretionary action) is allowed, you must do it; if it is prohibited, you cannot do it. Get it? Got it? Good.

I stumbled upon this divine commandment while reading T.H. White’s “The Once and Future King” (recommended to me by someone I love). A book that (thus far into my reading) describes the adventures of a boy who was to become King Arthur, and his inestimably talented but perpetually confused wizard/mentor: Merlin. The statement itself derives from a sequence where young Arthur (then called Wart) is transformed into an ant, whereupon he immediately encounters a sign containing the abovesupplied slogan. And appropriately so, because it seems to me that the whole Forbidden/Compulsory rubric works well for that sober, humorless, industrious species. But we’ll attend more to that later.

First, it is my solemn duty to pay tribute, yet again, to John Lennon, who fell cruel victim to an assassin’s bullet, forty years ago this coming Tuesday. Gunned down in cold blood. In front of his home. With his wife looking on. With his five-year-old son sleeping upstairs.

I think Lennon knew it was coming. It’s in his songs: “Come Together”, “Strawberry Fields”, “The Ballad of John and Yoko”, “Instant Karma”…

It always seemed that he knew he was playing with primordial forces, and understood the price he would, or might, pay, for doing so. He routinely did that which was forbidden; often failed to undertake what was compulsory. Paid for it with several hollow bullets, fired at point blank range, into his back.

John Lennon would not have made a very good ant.

But the rest of us are, at least arguably, embracing the change, if not enthusiastically, at any rate with equanimity. We are growing antennae, increasingly, monotonously, hauling grains of sand to build anthills, and never asking ourselves the reason why.

In parts of California and elsewhere, going out is forbidden; staying home is compulsory. Will we someday see an Orwellian 180, where everyone is forced out of doors, and entering one’s private place of shelter is not allowed? Well, consider this: the San Francisco City Council just voted 10-1 to approve an ordinance that prohibits smoking inside one’s residence – unless the substance consumed is the ganja blood. Burning a fattie in your North Beach flat is AOK. Lighting up a Newport, Cowboy Stick or (my personal preference) a JFR Maduro 770? Prohibited. Is getting stoned at your Haight Ashbury crash pad now a requirement? Let’s just say that at this point, it wouldn’t astonish me.

It all may change someday, in ways that surprise us all. Forbidden may become compulsory and vice versa. But for now, the message, at least in the markets, is clear: buying risk assets is mandatory; selling them is prohibited. At least that’s how I read the tape, as I bear witness to the Compulsory 500 and other indices in our arsenal of investable securities lurching from one all-time high to the next.

Special recognition for performance goes to out the lowly foot soldiers in our ant army: the Russell 2000, which has doubled since the virus made its presence known, and high yield debt, which rose in price to nearly the lowest yields in American lending history:

Quite impressive when you consider the circumstances. A surging global pandemic with no end in sight. Lockdowns accelerating at an accelerated pace. Tens, hundreds, of thousands of businesses either toetagged, or, at minimum, zombified. Untold of millions of poor souls anything but all dressed up. But with no place to go anyway.

And against this backdrop, the markets have built the biggest valuation anthill, out of the flimsiest grains of sand, in market history.

I believe this is because the greatest ants of all time, the GOAT ants, all reside in Washington DC. They always follow our titular protocols. Unless they don’t. And that’s only because they find something that has heretofore been compulsory, has now, suddenly and without notice, become (yes) forbidden.

While barely drawing any notice of late, the GOAT of all GOAT ants cool their ant heels at the Fed. It is these ants that are tasked with the fearful responsibility of making sure that the hill’s foundation, under no circumstances, be allowed to crumble. My take on this is as follows.

Since the Big Crash of the decade before the last (amazing!), the Fed money machines have been cranking out new units of the USD, without even pausing for a breath. Come covid, and they shoved the crank to full throttle. The outcomes have included, featured, interest rates so low that borrowing has become irresistible. As a result, we are now in the midst of the biggest credit bubble in perhaps a century or more, and there’s no path towards normalization. If credit markets are allowed to function as the Good Lord intended them, the bubble bursts. It’s lights out. There are no down buttons on the debt elevator; only a release hatch that will cause the capsule to crash to the basement.

The politically fed ants at the Fed know this, understand that if the market imposes normal supply/demand dynamics on the credit complex, the whole hill crumbles. Mark-to-market losses on existing paper would catalyze inexorable waves of selling, which would beget more selling. Economic agents would be destroyed, forcing the already-weary ants to carry their carcasses to wherever it is that they are compelled to deposit them. The whole hill is pancaked as though it were stomped upon by the sneaker of a ten-year-old boy.

So, propping up the dubiously rendered foundation is the perpetual duty of the Federal Reserve Bank of the United States. And they’re not alone. Among other allies are Central Banks with similar jobs in other anthill/jurisdictions. You don’t have to do this, but if you dare to, just compare our Treasury ratww (10- year yield: 0.97%) to those of formidable Formicidae foundations created in jurisdictions such as Spain (0.07%), Portugal (0.03%), or Greecw/Italy (both 0.62%).

And all of this is transpiring while our forbidden/compulsory paradigm is applying, in reverse cadence, to our currency, the USD. Which came down with an early case of corona and has been in free fall since Middlemarch:

Among the top beneficiaries of this dollar debacle is the EUR, the unit of account in which the above named countries issue their debt.

As such, one way to look at recent FX/government bond action is to infer that investors are selling dollars, buying euros, and using the proceeds to invest in the long-term debentures, at higher prices/lower yields, of counties depleted or bereft of assets, revenue streams, direct currency issuance prerogatives, or any path out of the economic wasteland that they face – pandemic or otherwise.

None of this makes sense — unless we apply our thematic axiom to the proceedings. In terms of the global capital economy, accumulating the Dead Prez is forbidden; divesting of them is compulsory.

And beyond this, we are witnessing the forming of the foundation of yet another sandy hill of fiscal stimulus. Look like we could cop another tril in the lame duck session, but that’s likely just the beginning. Come the turn of the year and the ushering in of the new Congress/Administration, that weakly constructed hill is likely to rise up to the heavens. Our elected ants tend to run out of steam pretty quickly, but while they are active, they work at a frenetic pace.

And their sandy construction efforts will be greatly enabled/empowered by the increasingly alarming tidings in public health. Current weather and policy trends – particularly as a winter that doesn’t even officially begin for another couple of weeks approaches — suggest that we will be spending a great deal of time at home (smoking weed?), but that they’re gonna pay us to do so. With feeble units of grainy, ever devaluing currency emerging out of the thin air in the Fed building in D.C. Winter won’t last forever, they will remind us, and a vaccine is coming, so just remain at your posts until further instructions are issued.

Spend your time online? Compulsory. Go to work or a restaurant? Forbidden. Buy stocks and bonds? Compulsory. Sell USD? Compulsory.

Get it? Got it? Good.

There’s only one problem. I miss you so much I’m not sure if I can make it. I know I’m supposed to stay away, and I know why, but what’s a poor ant supposed to do? Please. Tell. Me.

I know. As Forest Ant’s mom once said: “ants is what ants does”. But there are exceptions. Wart completed the anthropomorphic 360 back to human form and went on to become the most famous king in all of western folk legend. But he had Merlin’s help, and we don’t. John Lennon refused to be an ant and look what his refusal got him.

But in the end, what is not forbidden is compulsory. Until it’s not. I dream of the latter and hope that you’ll wait with me for that day to come.

In the meanwhile, if you want to find me, I’ll be slaving on the sandcastle hill with the rest of the drones in my unit. Until I’m told such work is forbidden, and something else is deemed compulsory.

TIMSHEL

Posted in Weeklies.